Carpe diem for Indian stocks: Exit and re-invest is the name of the game

Investors in Indian stocks are strategically timing their exits from one opportunity and identifying the right moment to enter another on expectations that a long-term bull run will continue to deliver better returns than all other asset classes.

While timing an exit is pivotal for investors, many of those who are booking profits from equities aren’t retreating from the market entirely, experts said. Instead, they are reinvesting in other promising opportunities in the equity market, even when the benchmark Nifty 50 stock index has been rising steadily, they said.

“Even if you take some profits now, you will find more opportunities to invest in equities as India is going to continue to see a secular bull run in the long term,” said Ajay Menon, MD and CEO of wealth management at Motilal Oswal Financial Services. At this moment, the stock market remains the best liquid investment option available, with the implementation of T+0 settlement, which enables investors to get their money on the same day, he said.

The Nifty 50’s one-year forward price-to-earnings (PE) ratio is 22.59 times compared with its five-year average of 21.65, according to Bloomberg data. Still, investors are not only keen to stay invested but are also eager to buy during market dips.

The growing interest in reinvesting in equities is fuelled by the steady increase in disposable incomes. As a result, investors are waiting for opportunities to invest and they have a greater capacity to absorb potential losses, which encourages them to buy during market dips, Menon explained.

For both short-term traders and long-term investors, reaching a target return often prompts an exit strategy.

Seizing opportunities

K. Joseph Thomas, head of research at Emkay Wealth Management, explained that many choose to reinvest their profit into equities by rotating the money across different sectors and stocks of varying market capitalisation.

“With higher returns, many investors re-enter the equity market, but they do so gradually, seizing opportunities as they arise,” he added.

The appeal of equities, he noted, stems from the consistently better returns that equities have delivered than other asset classes, keeping them attractive to investors.

“In recent years, the saga of Indian equities has been nothing short of a meteoric ascent, soaring higher and higher without a pause,” Motilal Oswal Financial Services said in its India strategy report in October. “This remarkable journey can be attributed to a trifecta of factors: robust corporate earnings, with a staggering 24% Nifty earnings CAGR (compound annual growth rate) over FY20-FY24; a surge in domestic flows into equities, amassing an impressive $107 billion during CY21-CY24YTD; and a remarkably resilient macro landscape that has weathered the storms.”

The MSCI India Index has already posted returns of 22% in 2024. But with China’s recent stimulus, some investors may shift their attention, finding that country’s equities more attractive than India’s at this point. So far in 2024, the MSCI China index is up about 26% while Shanghai’s SSE Composite and Hong Kong’s Hang Seng indices have posted returns of 11% and 25%, respectively.

Aashish Somaiyaa, CEO of WhiteOak Capital AMC, emphasises the importance of discipline in investing, advising investors not to let greed overshadow strategy.

“Many investors are eager to dive back into equities, but I always remind them: once you’ve hit your target returns, resist the temptation to chase more. Stick to your asset allocation plan.”

Vikas Khemani, founder of Carnelian Asset Management and Advisors, said India is a structural transformation story, at least for the next one decade, if not more.

“So, in this journey there will be many periods of low return or no return, but that should not worry most investors,” he said.

Hiren Ved, director & CIO at Alchemy Capital Management, said, “The beauty is that most investors know this, but external stimuli, greed and fear compels them to look for exquisite timing to invest and exit. It’s virtually impossible to catch every correction and peak and this time it’s not different.”

What makes this period interesting is the coexistence of greed, evident in the IPO segment and parts of the market, alongside fear, which is reflected in the constant endeavour to find an impending market correction, Ved said.